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Guide to the Dodd-Frank Act

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

On Sept. 15, 2008, investment bank Lehman Brothers declared bankruptcy and set off the worst financial crisis the world has seen since the Great Depression. Stock markets around the world cratered, millions of Americans lost their homes and U.S. unemployment rose as high as 10%.

In response to the crisis — sometimes called the Great Recession — Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. What has this bill done for regular consumers? This series covers the history and key provisions of Dodd-Frank, including how it impacts your everyday finances.

How does the Dodd-Frank Act regulate banks?

One of the main causes of the financial crisis was that banks made too many risky investments, especially in subprime mortgage loans. In the years leading up to 2008, large banks owed so much money to each other that if one went bankrupt, it would spread and cause other parts of the financial system to fail. These banks were in a situation where they were “too big to fail.”

The Dodd-Frank Act set up new regulations to prevent banks from getting to the point where they became too big to fail. First, the bill created the Financial Stability Oversight Council (FSOC) to monitor whether banks were taking on too much debt and putting themselves in a risky position.

If the FSOC determines that a bank is heading into dangerous territory, the council could require them to increase their reserve requirements, meaning the bank has to scale back its lending and hold on to more cash so they are less likely to go bankrupt.

Finally, Dodd-Frank required that every bank come up with a plan for a methodical shutdown should they become insolvent and find themselves unable to pay off their debts. That would help keep the problem from spreading to other financial institutions.

How does the Dodd-Frank Act help consumers?

The main goal of the Dodd-Frank act was to stabilize the banking sector so that consumers would not have to go through the pain and suffering of another financial crisis. Beyond this key mission, Dodd-Frank also set up additional protections for mortgage lending.

The financial crisis was partly caused by a subprime housing bubble. People took out mortgages they couldn’t afford, which included confusing costs like adjustable interest rates that could cause the monthly loan payment to go up.

According to David Reiling, CEO of Sunrise Banks, “Dodd-Frank mandated new mortgage loan disclosures that were designed to ensure costs were clear upfront and throughout the origination process, and also required creditors to verify income and debts to ensure a consumer could repay the loan.” As a result, shopping for a mortgage is safer and easier.

Finally, Dodd-Frank created a new regulatory agency specifically to help with consumer financial issues: the Consumer Financial Protection Bureau.

The Dodd-Frank Act created the CFPB

The mission of the CFPB is to protect American consumers in the market for financial products and services while educating them to make better decisions. They oversee consumer loans, credit and debit cards, credit card reporting agencies and payday lenders.

The CFPB does this in a few different ways. First, they help consumers research their different options, both with tools on their website and by requiring lenders to make it easier for people to compare their products. For example, mortgage lenders must give you a new disclosure explaining their fees before you sign up.

Second, the CFPB educates consumers by providing free resources on financial planning, retirement and loans. Finally, consumers can file complaints with the CFPB and they will fine companies that engage in bad practices.

To date, the CFPB has helped over 31 million consumers and returned $12.4 billion to consumers that was previously lost to companies that broke the law.

How does the Durbin Amendment impact banks?

During the negotiations for the Dodd-Frank bill, Sen. Dick Durbin (D-Ill.) sponsored an amendment to add a new regulation to the law. The Durbin Amendment set a limit to how much banks can charge for debit card transaction swipe fees.

Before the Durbin Amendment, banks were charging on average roughly 40 cents per debit card transaction. After this rule went into place, the Federal Reserve set a limit where banks could charge no more than 21 cents per transaction.

“The expectation was that the additional cost savings by the merchants would be passed on to consumers,” said Reiling. If businesses were paying less in transaction fees, they could lower their prices for American shoppers.

Need a new debit card to take advantage of the Durbin rule? These high yield checking accounts currently pay the highest interest rates.

How does the Dodd-Frank Act regulate financial markets?

Banks were far from the only cause of the financial crisis, which is why Dodd-Frank also created new rules for other parts of the market. First, the bill created the Office of Credit Rating at the SEC to oversee credit rating agencies like Standard & Poor’s and Moody’s.

These agencies review how likely creditor is to pay off a debt based on their financial situation. A company, government or investment with a AAA rating is supposed to be safer than one with a C rating. The problem was that agencies were too loose with their ratings before the financial crisis.

Brandon Renfro, Assistant Professor of Finance at East Texas Baptist University noted “A key issue in the mortgage crisis was that high credit ratings were given to derivatives of repackaged subprime loans. The goal of the new Office of Credit Rating is to reduce conflicts of interest and ensure that ratings are accurate reflections of risk.”

Dodd-Frank also launched the Volcker rule, which prohibits banks from participating in higher-risk activities like hedge funds, private equity funds and other proprietary trading. The bill created new regulations for high-risk investments called derivatives, which led to unexpectedly large losses for investors. Finally, Dodd-Frank created the Federal Insurance Office to oversee insurance companies.

The Dodd-Frank Act today

In response to the devastating losses of the Great Recession, the Obama administration used Dodd-Frank to revamp the rules for our financial markets. While the rules have some clear benefits for consumers, Dodd-Frank still has its share of critics who say it went too far: that it limits economic growth and restricts the ability of banks to lend.

This is why President Trump and the Republican party have taken steps to roll back parts of the law while still keeping the main framework in place. To see how the rules have changed, including how they helped increase credit union CD rates, check out the next part of our series.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

David Rodeck
David Rodeck |

David Rodeck is a writer at MagnifyMoney. You can email David here

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Banking

Money Management Tips to Help You Save Successfully

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Increasing your savings is easier said than done. The National Endowment for Financial Education’s most recent annual consumer survey found that saving money is the biggest cause of financial stress for more than 51% of Americans. If you feel the same way about your savings, don’t despair. There’s a way to manage your money instead of letting it manage you.

Top 14 money management tips

Have enough income to cover your monthly expenses, but can’t seem to gain traction when it comes to building a college savings fund, saving for a down payment on a home or growing your retirement nest egg? Start by taking charge of your finances by using these simple, yet practical, money management tips.

1. Use a budgeting app

Tracking your spending on the go is easy when you use a budgeting and personal finance app, like Mint or YNAB. Simply download your app of choice and, if you want to, link it to your bank account. You can then input your fixed and variable expenses and monitor your spending with the swipe of a finger. Keeping your budget within arm’s reach also helps you to stay on top of your daily spending and stick to a monthly budget.

2. Trim unnecessary expenses

Examine your spending habits to determine where you can cut unnecessary spending. Food is a common expense that can be reduced with a little planning. A grocery shopping list can be your first line of defense against overspending, as it’s easier to make impulse buys at the grocery store when you don’t have a shopping list to guide your purchases.

3. Commit to a written savings goal

Establishing a clear savings goal can keep you motivated and put a stop to impulse buys. Make your goal SMART: specific, measurable, attainable, relevant and timely. For example: “I will transfer $100 a month to my savings account so that by Month 20YY, I will have $800 to put toward a new television.” Post your written goal in visible locations to help reinforce your commitment to achieving it.

4. Live below your means

Spending more than you earn is a recipe for financial heartburn. When you have more bills than money with which to pay them, you could be subject to late fees and other financial penalties which make it harder to save. Cancel services you no longer need or can access at a lower cost. For example, nix the gym membership if you haven’t used it in five months or downgrade your cable package to only include the channels you actually watch.

5. Pay off debt

Eliminating debt may allow you to save more money. By bringing your balances to zero as quickly as possible, you’ll save on future interest charges. To potentially save money now, consider refinancing your debt to a lower interest rate or transferring your debt to a credit card with a lower interest rate.

Once your credit cards and loans are paid in full, you’ll have additional funds to contribute toward your financial goals. Use the same amount you were paying your creditors each month and deposit those funds into your savings account.

6. Build an emergency fund

Financial experts recommend stashing three to six months of living expenses in a liquid high yield deposit account in case of an unexpected job loss or another financial emergency. If this sounds overwhelming, start with a smaller goal of $500 for your emergency fund.

You can grow your emergency fund account by setting up an automatic transfer from your checking account to your emergency savings account each pay period. To grow your emergency fund faster, consider cutting unnecessary expenses, selling unused items around your home, depositing your tax refund or starting a side job.

Without an emergency fund, you risk paying for your next dental emergency or major car repair with your credit card or a personal loan, which can keep you in a debt cycle that’s hard to escape.

7. Increase your income

As long as you save the money instead of spending it, increasing your income with a side hustle, part-time job or more hours at the office is one of the quickest ways to reach your savings goal.

Before adding additional work to your already busy schedule, determine how many hours you have available along with how many months or years you’ll need to commit to the side hustle. When searching for side jobs, be wary of jobs that require an initial outlay of money to get started.

8. Plan for a regular review

Block out time on your calendar to evaluate your progress toward your savings goals. Consider establishing a monthly or bi-weekly financial review. Asking yourself if you’re still on track or if you’re able to contribute more towards your objectives is key to meeting your goals. A quick assessment of your savings plan can also help identify areas where you may still need to reduce expenses.

9. Never pay full price

Online and mobile coupons make it easy to save on groceries, clothing and big-ticket items like televisions and computers. When saving money is convenient, you’re more likely to stick to your savings plan. Do you do most of your shopping online? Install browser extensions that give you cash back when you shop through their online portals. Is mobile shopping more your thing? Download your choice of mobile app that offers cash back, gift cards and notifications of online and in-store deals.

10. Eat out less

Brown bag lunches and meal planning are smart money management strategies that can save you thousands of dollars annually, but sometimes you’ll want to treat yourself. To keep your spending under control, be selective about when and where you eat out. Make a list of local happy hours, upcoming culinary events and prix fixe restaurants to reinvent what it means to eat out on a budget.

11. Bank your financial windfalls

While it may be tempting to go on a shopping spree, upgrade your ride or take a weeklong vacation in the Caribbean when you get a financial windfall, that might leave you with a financial hangover. Once the thrill has subsided, you’re no closer to your savings goal. Instead, be strategic with any unexpected funds that come your way. Commit to adding at least half of these funds to your savings account.

12. Make savings automatic

Contact your financial institution to sign up for electronic funds transfer. This allows you to designate a set dollar amount for transfer from one account to another before you spend it on something else. For example, set $50 to automatically transfer from your checking account to your savings account on the fifth of each month.

If you have multiple savings goals, use a money savings app connected to your bank account to help to make auto transfers goal-specific.

13. Entertain your options

Movie buffs and avid readers rejoice! Free and low-cost services are available that allow you to binge-watch or read the latest big hit without busting your budget.

Movie rewards programs are available across the country. These programs allow you to earn points based on the amount you spend. Points can then be redeemed for additional movie tickets or concession items. Movie clubs allow fans to consume at least one movie per month at a discounted rate in addition to concession discounts.

The public library is an often overlooked resource for endless media entertainment. Look beyond the hardcover and paperback books, and you’ll find CDs, DVDs and magazines. Many libraries now provide a portion of their catalog online, which means you can access e-books, audiobooks, movies and music on your device of choice — for free.

14. Become rate savvy

Online search tools can reduce the time it takes to locate financial institutions offering the best returns on savings deposits. Use the Maximize Your Bank Savings tool from DepositAccounts, another LendingTree company, to help you identify the best place to park your funds to meet a specific goal. The higher the annual percentage yield (APY) the account pays on deposits, the faster your money can grow. Generally, certificates of deposit (CDs) limit withdrawals but offer higher APYs over savings accounts.

Next steps

A consistent savings habit is necessary to reach both short-term and long-term financial goals. If you’re intentional with your money, you’ll see the results. Recognize each achievement for what it is — documented proof that you’re in control of your financial future. Open a dedicated savings account today, and you might only be a few months away from achieving your first savings goal.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Tracy Scott
Tracy Scott |

Tracy Scott is a writer at MagnifyMoney. You can email Tracy here

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Banking

Money Inflation: How Inflation Has Affected Your Money

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Do you remember when you used to be able to buy a regular cup of coffee for less than a dollar? How about gasoline? As recently as 2004, the average gallon of gas cost less than $2. Today, these prices are a distant memory. Inflation is the metric we use to describe the phenomenon of rising prices, which is a basic fact of economic life that you should know about.

Inflation is the gradual increase in the price of goods and services over time. As inflation rates rise, you’ll pay more for the same goods and services, which impacts your daily life, as well as your investments. In the U.S., the current inflation rate is 2.2% as of July 2019.

What is inflation?

Inflation is a general upward trend in the cost of goods and services across the economy, from the price of food to the cost of housing, gas and clothing. As inflation rates rise, the buying power of currencies like the U.S. dollar falls, which means you’ll pay more for a product than you did several years ago.

However, it’s not quite as simple as comparing the cost of milk from one year to the next. Rather, economists determine inflation by looking at the prices of a “basket” of products and services and then measure the average price changes over time.

How inflation affects your money

Inflation impacts the buying power of the dollar, which in turn erodes the value of a consumer’s cash reserves. Each year, your dollars buy fewer goods and services, even if it’s a small change from one year to the next.

While inflation is largely inevitable, there are ways you can protect your money against inflation. Start by looking at your savings account. Up to 99% of savings accounts have interest rates that fall below inflation rates, which means that even as your money grows, it’s not growing quickly enough to keep up with inflation. A MagnifyMoney study found the average savings account rate is just 0.26%, well below the average 2% inflation rate.

You are most susceptible to inflation if you keep large reserves of cash rather than investing your money in vehicles that are more resistant to inflation. Look for investments that have historically appreciated at greater rates than inflation, as well as those that are specifically designed to protect against inflation. Treasury Inflation-Protected Securities (TIPS) are the most direct investments that can help keep your money safe from inflation.

Most bond investments set interest rates that account for inflation, but a TIPS investment has a principal adjustment mechanism increases with inflation and decreases during times of deflation. When your TIPS has reached maturity, you’ll be paid the adjusted principal amount or the original amount, whichever is larger. These investments pay out fixed-rate interest twice a year – the rates also rise and fall with inflation and deflation rates. TIPS are a good way to diversify your portfolio and the most direct way to hedge your money against inflation.

How inflation is calculated

Economists measure inflation with the Consumer Price Index (CPI), which focuses on how inflation affects consumers; the Personal Consumption Expenditures (PCE) index, which is more tightly focused version of CPI; and the Producer Price Index (PPI), which is based on surveys of prices businesses charge for goods and services. These three indices measure the cost of baskets of products and services, and each month reports are published on changes in CPI, PCE and PPI.

In 2016 and 2017, the CPI surveyed approximately 24,000 individuals in the U.S. Those consumers provided the CPI with detailed data regarding their quarterly spending habits, while another 12,000 provided information on their spending over a two-week period.

One easy way to understand inflation is to compare the buying power of $100 over the course of the last several decades. Think of how much rent and other housing costs have increased over the years. Those increases are likely be due to a wide variety of factors, but one of them is inflation and the declining buying power of the dollar. This graph indicates the changing value of $100 in 2019 money:

A closer look at inflation rates historically

As you can see in the graph, inflation has held pretty steady since 1940. However, there are also some aberrations that reflect the state of the U.S. economy at any given time. For example, the economy experienced deflation during the years of the Great Depression through the 1930s, when markets crashed and unemployment rates sat at historic highs. Deflation is the opposite of inflation: When the buying power of a currency increases over time.

You can also see rapid inflation growth in the 1970 to 1980 period. The Great Depression and the 1970s are outside of the norm, and the Federal Reserve Bank tempers inflation rates to keep them around 2%. The Fed aims to keep inflation rates at about this rate to provide greater spending stability for consumers, promote high employment rates and to temper long-term interest rates.

The bottom line

Inflation is inevitable, and it has a direct effect on your money. It’s important to understand how inflation affects your money and to keep an eye on the rate of inflation over time.

Despite the fact that you can’t stop inflation and the impact it has on your cash reserves, you can take steps to protect your finances from inflation. Look into investments that have inflation embedded into their returns, such as as fixed-income securities. You can also explore bond investments that account for inflation in their interest rates and principal payouts, such as TIPS.

Seek out investments that have historically appreciated more quickly than inflation has increased at a rate greater than 2% each year. You may not be able to stop inflation, but by diversifying your portfolio and monitoring the CPI over the years, you can know what to expect and how best to protect your money.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Anne Bouleanu
Anne Bouleanu |

Anne Bouleanu is a writer at MagnifyMoney. You can email Anne here